Equilibrium asset prices and savings of heterogeneous agents in the presence of incomplete markets and portfolio constraints

Albert Marcet and Kenneth Singleton

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We study the quantitative properties of a dynamic general equilibrium model in which agents face both idiosyncratic and aggregate income risk, state-dependent borrowing constraints that bind in some but not all periods and markets are incomplete. Optimal individual consumption -savings plans and equilibrium asset prices are computed under various assumptions about income uncertainty. Then we investigate whether our general equilibrium model with incomplete markets replicates two empirical observations: the high correlation between individual consumption and individual income, and the equity premium puzzle. We find that, when the driving processes are calibrated according to the data from wage income in different sectors of the US economy, the results move in the direction of explaining these observations, but the model falls short of explaining the observed correlations quantitatively. If the incomes of agents are assumed independent of each other, the observations can be explained quantitatively.

Keywords: Incomplete markets; credit constraints; equity premium puzzle; consumption volatility; simulation (search for similar items in EconPapers)
JEL-codes: E21 G11 G12 (search for similar items in EconPapers)
Date: 1990-04, Revised 1998-07
New Economics Papers: this item is included in nep-dge and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (20)

Downloads: (external link)
https://econ-papers.upf.edu/papers/319.pdf Whole Paper (application/pdf)
https://econ-papers.upf.edu/papers/319fig.pdf Figures (application/pdf)

Related works:
Journal Article: EQUILIBRIUM ASSET PRICES AND SAVINGS OF HETEROGENEOUS AGENTS IN THE PRESENCE OF INCOMPLETE MARKETS AND PORTFOLIO CONSTRAINTS (1999)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:319

Access Statistics for this paper

More papers in Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra
Bibliographic data for series maintained by ( this e-mail address is bad, please contact ).